What Should You Do When Banks Reduce Interest Rates?
The Reserve Bank of India (RBI) in April 2010 introduced the base rate system. The system came into effect from July that year, replacing the existing Benchmark Prime Lending Rate (BPLR) system. The circular that announced the arrival of the new lending benchmark put a word of caution, meant to be taken seriously by banks.
"In the case of existing loans of longer/fixed tenure, banks should reset the floating rates according to the above method at the time of review or renewal of loan accounts, after obtaining the consent of the concerned borrower/s.”
However, this was merely a directive that bank may or may not choose to follow. The circular followed:
"Existing loans based on the BPLR system may run till their maturity. In case existing borrowers want to switch to the new system, before expiry of the existing contracts, an option may be given to them, on mutually agreed terms. Banks, however, should not charge any fee for such switch-over."
In March 2016, the central bank replaced the base rate system with the marginal cost of funds-based lending (MCLR) regime. This time around, even the cautionary direction did not find a mention in the final circular. This momentary lapse of caution on part of the central bank has led to home loan borrowers in India losing a great deal of their money.
This despite the many kind cuts that the central bank implemented in terms of interest rates. The Reserve Bank reduced the policy repo rate ─ the rate at which the RBI lends money to scheduled banks ─ by a cumulative 175 basis points during January 2015 to June 2017. While it may have sounded like good news to borrowers, they have to personally make sure they are able to reap the benefits.
What should you do when banks announce a rate cut?
Ideally, banks should re-calculate your outstanding liabilities based on the new rate and intimidate you about the same. Online platforms such as mobile banking and net banking have made it quite easy for banks to stay in constant touch with their customers. Additionally, banks can also send you an email or a text message on your phone to give you the good news. Unfortunately, this is a practice most banks are giving a miss. In most cases, it is only after the borrower approaches the bank personally and requests it to implement the changes, the benefits are extended.
“I took a loan in 2013. I was under the impression that the bank would keep implementing the changes as and when they come. The assumption was entirely wrong. Till date, I never received any communication from the side of the bank about falling interest rates. Recently, I went to my branch and switched my existing loan to the new lending benchmark. It is only now that the bank has recalculated my outstanding amount,” says Gurpreet Singh, who works for a Delhi-based research company.
When you approach the bank for shifting your existing loan to the new benchmark, it would ask you to pay a “nominal charges” for the same. In case to chose to go to another bank for the purpose, you may end up shelling out additional money to avail of the benefits of interest rate cut.
Also read: How To Make The Most of The MCLR Regime